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Luckily this sort of thing rarely happens. The reason is that you need great engineers to trust you if you want to succeed. By founding a startup you are taki
by justin_vanw 14y ago
Luckily this sort of thing rarely happens. The reason is that you need great engineers to trust you if you want to succeed. By founding a startup you are taking great personal risk, but your employees are also taking some of that risk with you. Most startups pay (very very) below market salaries, and bring employees up to parity with a much less terrible place to work (very few very bright people would prefer to work in at a big company), and by giving out options.
I suspect that the CEO and other high level managers at this company will have serious trouble recruiting the next time they want to start something new, because they now have nothing to offer. Nobody is going to trust their promises, stock options they issue will be seen as basically worthless (since everyone will think they are likely to be screwed out of them), so they will have to pay market rates (which is probably 2x-6x what startups generally pay in total compensation).
If I were a founder of a company, and I were faced with this choice, I would probably rather let the company fold than cash out (or in this case probably just not go under) while leaving employees behind. Failure is rarely punished in the valley, but nowhere is dishonesty or double dealing more likely to be recognized and rejected.
- danielweber 14y agoMany venture capital firms have done crap things many of times and have had no problems getting deals again and again.
- MediaSquirrel 14y agoMore likely scenario: the company company is about to go bankrupt and finds a buyer. The buyer says: We will pay your investors $.50 on the dollar in exchange for all your assets and IP. We don't want any of your people as part of the deal because we want to shake things up, install new management and dramatically reorganize the Business because the way it's been running to date sucks. Like, seriously, you drove it into the ground. That said, we reserve the right to rehire some of them after the deal closes.
- dchichkov 14y agoI would argue that these employees on "(very very) below market salaries" are taking more risk than that hypothetical founder. They take same uncertainty risk [company failing]. Similar financial risk [unless founder has invested own money]. But. They don't have any control over the company. That results in larger uncertainty risk.
- justin_vanw 14y agoI disagree. Employees are still collecting a salary, and they probably haven't put lots of money into the company up front (although over time they are effectively doing so in the form of lower salary). Generally founders of startups have taken a leap of faith well before there are any employees collecting a salary. They work full time on the idea for a year or two before they can approach investors, living off of savings or small investments money from friends and family. By the time the first employees are brought in, there is enough money in the bank to pay salary and benefits for a year or longer. Do I think that most startups under value the opportunity/uncertainty risk that employees take? Absolutely.
- dchichkov 14y agoI'm not sure, that past activities of founders (or employees) are relevant to risk estimation. It should be just financial/lost opportunity/uncertainty risks that go into the equation. A particular founder or employee is _going_ to take some risk by joining/or staying with the company.
- rhizome 14y agonowhere is dishonesty or double dealing more likely to be recognized and rejected. Do you know of any examples of that kind of rejection? When Hollywood directors make a movie that bombs, it's common for them to be put into "Director's Jail," where they don't get to make lucrative movies for a long time (see: Michael Cimino), has this ever happened with a C-level? My sense is that these bridges are fireproof.
- trimbo 14y ago> very few very bright people would prefer to work in at a big company Citation needed?
- justin_vanw 14y agoYou make a good point. Lots of extremely smart people work for large companies. If you held all variables constant other than company size, I suspect most people would prefer a smaller company, but that is just an educated guess, and in reality company size is heavily correlated to other factors.
- jberryman 14y agoIt's probably a healthy attitude to assume stock options and equity in a startup are worthless anyway. At least they shouldn't factor into any important life choices you make.